Although the focus today will be on yesterday’s report from Gartner of an expected sharp drop in personal computer sales — and a separate report from IDC this morning — a second question is how the company’s server-chip business is doing ahead of its Q2 earnings report on July 15th.

The revenue warning yesterday from server and storage component maker QLogic (QLGC), which was explained by the company in vague terms, raises a question whether the server market might be weaker than previously thought.

On the negative side of the account today is D.A. Davidson’s Mark Kelleher, who has a Buy rating on QLogic stock, but who late yesterday cut his price target a buck to $17.

Writes Kelleher, part of this is a slower roll-out of the “Grantley” server platform from Intel:

According to QLGC, the lower demand was a result of a slower next- generation server transition (likely referring to the Grantley product cycle) in enterprise environments, as well as weakness in the storage sector. Grantley limping. Recall in the March quarter the company delivered revenue results slightly below the consensus expectation, and pointed to a weaker than expected server- transition cycle. The server transition cycle is important to QLGC because the new Grantley-based servers enable 10 Gig Ethernet, and QLGC is a leading provider of 10 Gig Ethernet adapters that connect servers to Ethernet. Storage. The fact that QLGC mentioned storage as weak is interesting. Storage devices (especially Flash-based storage devices) typically connect with Fibre Channel, whose host- bus adapters are the majority of QLGC’s revenue (approximately 75% of revenues from the Fibre Channel protocol products, 25% from Ethernet protocol products). QLGC’s results might point to weakness in the Flash storage market.

Micron indicated continuing weakness in PC demand globally and QLogic indicated sluggish enterprise server and networking demand with slower adoption of Intel’s new Grantley server processor platform in the enterprise. In our opinion, Intel continues to see strength in the datacenter segment (customers such as Google, FaceBook, Amazon, Baidu, Microsoft, etc.) with healthy adoption of the new Grantley server platform. However, we believe that continued macro challenges in Europe and China/Asia could dampen datacenter growth also.

Intel shares today are up 13 cents, or 0.4%, at $29.06.

Update: Morgan Stanley‘s Katy Huberty, who has an Overweight rating on QLogic shares, also thinks this is not specific to QLogic but rather a warning sign all is not well in IT spending:

We view these issues as a concern for the broader enterprise market rather than reflecting a company specific problem, and expect QGLC market share was largely unchanged during the quarter. Our June CIO Survey report (link below) echoes similar macro concerns with a recent bias toward downward budget revisions and public cloud adoption pressuring data center hardware spend. Our June CIO Survey results echo QLGC concerns, including: 1) expected downward budget revisions (Exhibit 1), lengthening purchasing cycles, and a mentality of cost cutting and, 2) accelerated shift of spend to public cloud versus server and storage OEMs (Exhibit 2). As a result of these pressures, servers saw the biggest downtick among hardware categories in our June CIO Survey (“Overall IT Budget Growth Sustains, But a Few Cracks Starting to Show”), despite strengthening spend on the back of Windows Server 2003 support expiration and Intel Grantley.

Shares of storage system connector maker QLogic (QLGC) are down $3.21, or 23%, at $10.77, after the stock was halted this morning before the company announced it was slashing its outlook for the June-ending fiscal Q1, citing “lower than expected demand due to general weakness in the Company’s traditional enterprise server and storage markets, and a build-up of inventory at certain of its OEM customers due to a slower next-generation server transition in enterprise environments.”

The company is a supplier to numerous firms, including Hewlett-Packard (HPQ) and Cisco Systems (CSCO). The news is not affecting them, however, this morning, with HP up fractionally at $30.56, and Cisco up 0.7% at $27.17.

The company now sees revenue of about $113 million, below its previously forecast range of $124 million to $132 million, and below consensus for $128 million. EPS is seen in a range of 16 cents to 17 cents, below the prior view of 23 cents to 27 cents, and below consensus of 25 cents.

QLogic’s CEO, Prasad Rampalli, remarked that the company was “disappointed with the level of business activity during the quarter,” adding,

We will work through these headwinds, leveraging our technologies and solutions to expand our addressable market opportunities. We believe QLogic is well positioned to capitalize on these opportunities in the data center.

The company plans to discuss the quarter in greater depth on July 30th.

Bulls on the Street are a little stunned by all this, it would seem, and not entirely clear what is going on.

BMO Capital’s Keith Bachman, who has an Outperform rating on the shares, and a $15.50 price target, writes that weakness in servers is a shocker:

Unlike hard drives, in which we think most investors expect very weak results, we think most data points around servers have been ok while storage data points have been mixed, and thus we think investors were generally expecting an in-line type of June quarter from QLGC, or at least within the range.

Bachman is perplexed by the issue of inventory, and the steep, steep drop in sales:

The issue we are not clear about is the role inventory at OEMs played in the negative pre-announcement. Based on expected revenues of $113 million for the June Q, this would suggest a q/q revenue decline of 15%. While QLGC results tend to have volatile quarterly patterns, including the run off of legacy businesses, over the past four years June revenues have averaged a 1% q/q decline. Hence, our first take is that inventory reductions must have had a meaningful impact.

Raymond James analysts Mitch Steves, who has an Outperform rating on the stock, and a $17 price target, thinks this is about a breakdown in fiber channel networking

We have seen negative data points in the overall server market and think the miss is likely attributable to Fibre Channel demand. With this dynamic in mind, Ethernet revenue could increase as a percentage of total Advanced Connectivity revenue. With lower gross margins in the 40% range, we think it is prudent to anticipate EPS of $0.16 at the lower end of the recent pre-announcement.

He notes how many enterprise vendors are potentially affected:

QLGC’s top 3 customers include: HPQ 27% revenue exposure, Dell at 17% and IBM at 11% as of FY15. In addition, the Company provides solutions to Cisco, EMC, Fujitsu, Huawei, Inspur, Lenovo, NetApp and Oracle. QLGC’s top 10 customers represent 81% of total revenue and we believe this is a slight negative for companies exposure to traditional enterprise server and storage markets. Finally, Emulex is QLGC’s nearest competitor and who was recently acquired by AVGO.

Srini Nandury with Summit Research, who has a Buy rating on Logic, writes that he thinks things likely got worse in June, and that the customer that’s clearing inventory is probably Lenovo (0992HK), which has “issues in China and general weakness in Europe.” Things will get worse before they get better, he writes:

We believe the inventory build up will take at least a quarter or two to wind down and Qlogic will likely lower next quarter’s estimates well below consensus. Therefore, we expect a steep sell off of the stock and the stock could be down to $10 levels presenting an attractive buying opportunity for investors with a stomach to hang in here.

Richard Kugele of Needham & Co., who doesn’t follow QLogic, but who follows shares of customers such as Hewlett, writes that it’s not clear if this is just individual customer issues, or signs of a broader IT slowdown:

While some level of company-specific factors can’t be discounted in the pre, we believe the perception will be that this miss is a negative for x86 server players (which would include HPQ and SMCI) within our universe. In terms of HPQ, the company is the largest x86 server player in the world with over 25% market share. If the transition to Grantley is suddenly slower mid-year than some companies expected, that would be interpreted as negative for HP’s server line. Similarly, for SMCI, Grantley represented roughly 50% of shipments in the March ending quarter. A gradual increase in that percentage was expected over time (cycle typically lasts 12-18 months), particularly around the expiration of Windows 2003 Server this month. Alternate View: We note that at SNX’s recent analyst day last week, servers were cited as an opportunity given the refresh and no weakness in the business was noted. Additionally, using QLGC as a proxy for SMCI performance in recent years would have been consistently inaccurate. So data points are not all pointing in the same direction as QLGC. Is this weakness part of a broader slowdown in enterprise IT spending? Are macro concerns leading to an incremental pause as buyers wait to see if the US is impacted more directly by the mess in Europe or China? Earnings season will have to sort out these questions.

Enterprise software will be the brightest spot in overall corporate spending on information technology this year, perhaps a relief to Oracle (ORCL), Salesforce.com (CRM) and others, according to a release today from Gartner, which sees overall IT spending in decline by 5.5% this year, at $3.51 trillion.

The authors of the report, John-David Lovelock and staff, stress that the decline is a largely foreign-exchange impact, given the rising U.S. dollar:

Such are the illusions that large swings in the value of the U.S. dollar versus other currencies can create. However, there are secondary effects to the rising U.S. dollar. Vendors do have to raise prices to protect costs and margins of their products, and enterprises and consumers will have to make new purchase decisions in light of the new prices.

Sales had been expected to decline 1.3% as recently as April, the authors note. In dollar adjusted terms, the sales will actually rise 2.5%, below a prior 3.1% growth estimate previously.

The report says that spending on corporate software programs will decline less this year, only 1.2%, at $914 billion.

Gartner emphasizes enterprise spending is for cloud computing software, or, specifically “software as a service,” or SaaS, and they explicitly note that “many software vendors will try not to raise prices because software as a service (SaaS) is about market share, not profitability.”

“Raising prices could take software vendors out of a sales cycle, and these vendors don’t believe they can afford to lose a client.”

One of the biggest categories of decline is projected to be the “devices” category, where continued spending on mobile phones is being offset by a continual deterioration in the outlook for PCs. Apple’s (AAPL) iPhone is mentioned in particular as “keeping overall phone spending consistent.”

Fortunately for Intel (INTC), a major strength in the category of data center spending is server computers, and mainframes may also be a source of good news for International Business Machines (IBM):

The overall near-term data center weakness is slightly offset by a more positive outlook for the server market. The server market is benefiting from a stronger-than-expected mainframe refresh cycle, as well as increased expectations for hyperscale spending.

The PC and tablet market continues to weaken. The expected 10 percent increase in average PC pricing in currency-impacted countries is going ahead, delaying purchases even more than expected. Excessive PC inventory levels, especially in Western Europe, need to be cleared, which will delay Windows 10 inventory in the second half of the year.

Shares of wireless chip giant Qualcomm (QCOM) are down $1.01, or 1.6%, at $63.66, after Drexel Hamilton’s Rick Whittington this morning cut his rating to Sell from Hold, warning of rising competition, while also trimming expectations for Micron Technology (MU) and writing of multiple challenges for Intel (INTC).

Whittington, cutting his Qualcomm target to $55 from $60, writes that customers, including Apple (AAPL), are demanding price concessions, he believes, which could hit September earnings:

Samsung Electronics (005930KS), which already rejected Qualcomm’s latest apps processor in the latest flagship phone, the Galaxy S6, is looking to make inroads in chips against both Qualcomm and Intel, he writes:

Apple and Samsung putting on the heat, smaller China mobile OEMs are also requesting price breaks as Samsung and Intel get more aggressive. Samsung baseband and app. processors being offered at advantageous terms to outside OEMs comes after of aggressive Intel mobile pricing. 14nm logic hitting yield milestones, Samsung is turning up the heat on Intel and Qualcomm in a quest for domination well beyond memory.

A lot hangs on new process technology work with TaiwanSemiconductor Manufacturing (TSM):

Apple sharing similar views on how Qualcomm prosecuted a once commanding patent portfolio is also requesting better pricing. Leading edge no longer available from long-time foundry TSMC and not wishing to rely on Samsung, Qualcomm has struck a China accord. Just where last week’s announced 14nm process development deals go, they’re liable to take time to bear fruit, TSMC 10nm at best two years out. Until this, Qualcomm will steadily but slowly ramp IoT adjacencies liable to run at a lower net margins to what was previously enjoyed. Whether our earlier speculation on M&A comes to fruition another dilutive element in the equation, Qualcomm looks a name to backpocket.

With respect to Intel and Micron, both are trying to head off incursions in chips from Samsung through their partnership to develop 3D NAND:

An end of 2016 Samsung 10nm logic ramp could lead Intel to quickly de- emphasize today’s huge loss-generating mobile processor strategy. At the same time, it heightens Intel’s emphasis on a bet the ranch EUV, new materials thrust to get to potentially game-changing 7nm in 2017. 1st gen. 3D NAND 32 layers, then succeeded by 48 layers, the Intel- Micron JV could also prove consequential in each fending off Samsung

However, there’s also some chatter of slowing of server-chip orders for Intel, which raises the stakes for PC-based sales of DRAM:

Rumblings one hyper-scale compute customer, also key search engine provider, has slowed summer build plans, have cropped up recently. Such would up the stakes for at least a modest second half PC rebound while furthering the import for both 3D NAND and 7nm logic’s timing. Micron continues to say it expects strong PC DRAM demand in the back half of this calendar year, any PC unit gains working to Intel’s benefit.

Whittington rates Intel a Buy, with a $40 price target, and rates Micron a Sell, with a $17 target.

Shares of networking chip vendor Cavium (CAVM) are up 91 cents, or 1.2%, at $74.80, after the stock this morning received a favorable initiation from CLSA’s Srini Pajjuri, who starts the stock at Outperform with an $85 price target.

Cavium’s existing business serving cloud computing, mobile computing, and security products “will be sustainable for the next several years,” believes Pajjuri, while the company can look forward to new business in ethernet switching and server computers using the ARM Holdings (ARMH) technology.

Though the stock is way up, and not cheap, he thinks it has room to run given a higher growth profile:

Cavium’s shares have outperformed the SOX index by 29 points in the past 12 months, and 16 points YTD. While the company is seeing a slowdown in some of its markets in the near term, we expect topline momentum to be sustained for the next 2-3 years, and are forecasting earnings to yield a 28% Cagr over the next three years. We expect Cavium to benefit from product cycles in its core markets and share gains in adjacent markets such as Ethernet switching and ARM servers where the company has no presence today. At 31x 16CL PE, valuation is not inexpensive, but we believe is justified given the 20% three-year estimated topline growth and 28% EPS growth. The 16CL PEG ratio of 0.9 is at a discount to semiconductor peers. Our US$85 target, which is based on 27x 17CL PE, implies that the stock trades at a PEG ratio of ~1.0 over the next 12 months.

The company’s three main “multi-core” chips, the “Octeon” processor, the “Nitrox” line, and the “LiquidIO” devices, span the gamut from wireless base stations to routers to software-defined networking (SDN) boxes.

Pajjuri offers this breakdown of the product line (click the image to see it larger):

The core of the company’s Octeon family is the ability to do more sophisticated packet processing, which affords it a higher growth, potentially, than the rest of enterprise networking:

The Octeon multicore processors are primarily targeted for higher-end switches, security appliances, firewalls and enterprise routers. Cavium’s key competitive advantage is that its processors are designed to handle packet processing at a much faster pace than general purpose CPUs, and are more programmable than custom chips. Octeon processors integrate several accelerators to speed up specific networking functions and offer programmability at the same time. We expect Cavium to continue to gain share from general purpose processors and capture a higher portion of bill of materials (BoM) due to the growing need for intelligence.

Cavium primarily targets Microcells and Picocells, and doesn’t have much presence in the Femtocell market. Femtocells currently dominate the small cell market, but we expect micro/metro cells to gain traction in the next few years as bandwidth requirements grow exponentially. Cavium’s Fusion family combines Octeon MIPS64 architecture with baseband DSP cores, LTE/3G hardware accelerators and digital front-end functionality into a single chip for small cell base station applications. Competition includes Freescale, TI, Broadcom and Qualcomm.

In the $4 billion Ethernet switch market, where Broadcom (BRCM) dominates, Cavium will start shipping its “Xpliant” product in 2016, and Pajjuri has modest expectations given how entrenched Broadcom is, selling to Cisco Systems (CSCO) and many others:

Broadcom has the dominant position in cloud/hyperscale data centers. The company’s Trident switching ICs are the de facto standard for ToR switches sold into data centers. Broadcom established a strong lead during the 10G Ethernet transition and continues to dominate the 10/40G switching silicon market. The company is currently shipping its third-generation Trident chip, which powers a wide variety of customer networking switches from most major OEMs including Cisco, Juniper, Arista, Huawei and HP. We also believe Broadcom is the key supplier for ODMs such as Quanta and Accton, who directly sell to hyperscale customers such as Amazon, Google and Facebook […] Cavium is currently sampling its Ethernet switch IC products and expects initial revenue in 1H16. We are currently modeling minimal revenue in 2016 given Cavium’s new approach and lack of experience in this market. That said, the market opportunity is large and even if Cavium gains a small market share, it could have a meaningful impact on the company’s growth prospects.

Shares of DRAM and NAND maker Micron Technology (MU) are down $1.11, or 4.4%, at $24.02, after Morgan Stanley’s Joseph Moore cut his rating on the shares to Underweight from Equal Weight, and cut his price target to $21 from $30, writing that a build-up in DRAM memory chips and a ratcheting-back of DRAM use in mobile devices means pricing and volume will be weak.

Moore sees “the stock trading into the low $20s as earnings power declines to about $2.”

Pricing of DRAM, based on his “checks” with entities in Taiwan, is weak in PC, servers, and in graphics applications, writes Moore:

Everyone we talked to believed that PC, server, and graphics pricing will remain under pressure in 3q, and several believed it will remain pressured all year, while others were more optimistic about a seasonal recovery in 4q. The supply transition towards mobile is below expectations, which limits the recovery in computing markets. While all company managements appear confident in 2016 dynamics, buyers and sellers of DRAM showed less certainty.

PC DRAM prices will remain weak through the rest of this year, in part because Microsoft‘s (MSFT) forthcoming Windows 10 operating system will emphasize “lower DRAM content, with Microsoft proposing to charge OEMs $25 for small form factor notebooks with 2 GB of DRAM.”

Apple‘s (DRAM) use of a higher DRAM count in its next iPhone won’t save the market for mobile DRAM, he writes,

There is clearly optimism about Apple doubling DRAM content, but several contacts noted that Apple’s 2 GB phones are taking share from other vendor’s 3 GB phones, so the overall effect is somewhat neutralized. There is also still some inventory excess in the China market, with some cancellations from a large Chinese customer in the last couple of weeks. We did confirm that producers have hit the brakes on capacity migrations from PC to mobile, which we first heard from DRAMexchange [...] Once Apple completes the move from 1 GB to 2 GB in 2h15, we see little growth in DRAM content per phone in the midrange or high end. Android phones at 3 GB will likely stay at 3 GB, android phones at 2 GB should stay at 2 GB, and Apple will stay at 2 GB. We see the China white box market exiting 2015 at 1.6 GB per phone, per our checks. Our channel contacts have indicated that all of those segments should show little movement next year, with perhaps some of the emerging market phones in India moving from 1 GB to 2 GB.

Gus Richard, formerly with Piper Jaffray and now with Northland Capital Markets, this morning initiates coverage of Advanced Micro Devices (AMD) with an Outperform rating and a $5 price target, writing that there’s “unrecognized value” and that investors are too skeptical.

AMD shares are up 3 cents, or 1%, at $2.34.

“Investors have decided that AMD has hit the iceberg and they are waiting for the ship to sink,” writes Richard. “However, we believe that AMD still has time to avoid the collision, and if all else fails investors will be bailed out by the lifeboat of M&A.”

One big point, says Richard, is that in the data center, where Intel has handily trounced AMD in sales of server microprocessors, there is still a need for x86-compatible chips, of which AMD holds the only cards outside Intel. That could make AMD a target in the data center for Xilinx (XLNX) or for Chinese state-owned investment vehicles, which have been gobbling up targets:

We believe that shifting existing data center workloads from x86 to other CPU architecture would require a herculean effort to re-write the existing software. For this reason, we continue to believe that x86 will continue to dominate the server market and this also explains the lack of traction for ARM based servers. In addition, we hear that web scale data center operators are frustrated with Intel’s control of server architecture and high prices. We believe that this makes the cross licensing agreement between AMD and Intel exceedingly valuable. While change in control would invalidate the existing cross license agreement, we think in most circumstances Intel would be very willing to renew the agreement with a buyer of AMD as it owns several key patents used in modern x86 processors. Finally, we think the likely buyer is China Inc. as China wants its IT infrastructure to be secure and controllable and needs to be owned by domestic companies. Another potential acquirer would be XLNX as it would combine FPGA and x86 making a viable second source for CPUs in the data center market. However, given the margin profile of AMD we think short term concerns would overwhelm the longer term opportunity of an XLNX-AMD combo.

Expanding on the Chinese theme, Richard notes the Chinese spend a lot on x86: “We estimate that the value of x86 processors and associated chipsets sold into systems consumed in China is approximately $12B.”

And China has an interest in controlling x86 technology on which their banking system runs:

The Chinese banking regulator, China Banking Regulatory Commission, proposed a rule that would require financial institutions to develop core IT that is “secure and controllable” and likely must be owned by a Chinese entity. From a Chinese prospective, exports from the US are neither secure nor controllable.

Intel might go along with a purchase of AMD, thinks Richard:

Would the x86 license survive an acquisition? While change in control would invalidate the existing cross license agreement with Intel, we think in most circumstances Intel would be very willing to renew the agreement as AMD owns several key patents used in modern x86 processors. In addition, we believe that Intel is interested in expanding the use of x86.

It’s not entirely about M&A: Richard also is upbeat on the prospects for the “Zen” CPU design that was unveiled on May 6th in New York by CEOLisa Su and CTO Mark Papermaster.

Zen might make AMD a more solid number two behind Intel in servers, which would be “huge,” he thinks:

We believe that AMD has a strong design team working on the new Zen process core due out next year. We believe that this will be a significant improvement over its current product offering, and may enable AMD to once again be a viable second source to INTC in the data center. We estimate that with roughly 10% market share or $1B in DC revenue gross margin in CY17 would increase to the high 30% range and earnings could reach roughly $0.50. This would be in line with AMD’s three to five year target model.

Shares of Hewlett-Packard (HPQ) are down 13 cents, or 0.4%, at $33.17, and shares of EMC (EMC) are up 11 cents, or 0.4%, at $27.13, as the Street continues to contemplate the prospect of a tie-up between the two.

As I mentioned yesterday, Raymond James’s Brian Alexander opined once HP splits into two companies, HP Inc. and HP Enterprise, come November 1st, the latter, a company selling networking and servers and storage, will end up buying EMC.

Our analysis of the “Morris trust” tax law suggests subject to “negotiation black-out periods” a tax free merger between EMC and HP Enterprise (post a tax free split of HP) is possible. Anti-Morris Trust regulations essentially entail black-out periods for negotiations between parties involved in a “spin-merge” transaction around the date the spin closes in order for the two transactions – the spin and subsequent merger – to remain tax-free. In a specific “black-out period” scenario which is relevant to a potential HP Enterprise – EMC deal, the key requirements for a tax-free stock merger between EMC and HP Enterprise while maintaining a tax-free spin of HP are (a) the establishment of a valid business purpose for the HP split, (b) a 1 year black-out period of “no substantial negotiations” between HP and EMC prior to the completion of the HP spin-off and (c) a further six-month blackout period following the spin before talks between the parties can begin.

Ghai puts together the timing of the HP split and EMC’s ongoing relationship with activist firm Elliott Management, which has been pushing for some kind of bold action by EMC:

By the time the HP spin-off is finalized in September /October 2015, one year will have elapsed since the two parties held “substantial economic negotiations”. Coincidentally we note, it is the same timeline as when EMC’s standstill with Elliott will expire. Based on the above we believe if HP Enterprise and EMC wait for six months after the spin closes (March / April 2016) to resume a dialogue, they can consummate a tax free merger while maintaining the tax-free status of the spin.

On the negative side, Pacific Crest‘s Brent Bracelin notes a reluctance to big deals, even if M&A is “highly likely” after November 1st:

Based on the planned structure of HP Inc., it is expected to take on as much of the debt burden as possible while maintaining investment-grade ratings (i.e., debt-to-EBITDA ratio of roughly 2x). This should position HP Enterprise with adequate firepower to begin pursuing strategic enterprise assets that could help better position HP’s standing relative to competitors, including EMC, Cisco, IBM and Oracle. While management plans to pursue software-centric technologies with high gross margin models similar to Aruba Networks (acquired for 2.7x EV/sales), it was clear that the company would be very prudent and disciplined relative to valuation, even outlining scenarios of looking at earlier-stage technologies if deemed strategic.Now that it is in the process of breaking away from a much larger, complex organizational structure, the HP Enterprise leadership team didn’t seem to have a sense of urgency to rebuild another mega-enterprise IT supplier through consolidation. While the company didn’t rule out a mega-M&A deal, the preferred strategy appears to be to make small-to-midsize acquisitions that could help transform the model.

Storage has been an underwhelming part of HP Enterprise for the better part of the past five years, with 3PAR as the one shining segment that has continued to flourish. After introducing the first all-flash 3PAR array last year, the company has sold over 1,000 units. One-third of new orders are all-flash configurations. Win rates against VMAX and XtremIO are increasing. 3PAR has also gained significant share in midrange storage over the past two years. After the spin, we would not be surprised to see HP highlight more of 3PAR’s progress that could warrant its positioning as a dark horse that is gaining share at the expense of EMC, NetApp, IBM and Hitachi.

In other HP news today, Susquehanna Financial’s Mehdi Hosseini, reflecting on HP’s “Discover” customer event in Las Vegas this week, muses that the prospects for “Memristor,” an advanced memory technology. It looks like it’s not going to happen in a hurry:

HP has tempered expectations around the “Machine” (a project announced at last year’s Discover event, which was based on Memristors, a form of memory that can permanently store data.) HP plans to instead release a DRAM version of the Machine that has 320 TB of memory, and then will release a Machine with phase change memory (after which, memristors will be expected). While we do not view the change in strategy as impactful to our coverage in the short-term, we ultimately believe a trend toward memory-driven architecture could be L-T positive for memory producers SK-Hynix, Samsung and MU.

Needham & Co.’s Quinn Bolton today raises his rating on shares of Cavium (CAVM) to Buy from Hold, with an $85 price target, writing that his meetings with management, and with original design manufacturers (ODM) at the Computex trade show in Taipei, Taiwan, this week, leave him “incrementally more positive on the prospects for several of Cavium’s new products, including ThunderX, LiquidIO 2 and Xpliant.”

Cavium shares are surging, up $4.97, or 7%, at $75.83.

Bolton writes that the manufacturers with whom he talked indicate the 48-core “ThunderX” processor is coming to new data center devices this year, and is besting Intel (INTC) server chips on some metrics:

He’s also bullish on the company’s networking parts, “LiquidIO 2” and “Xpliant”:

Cavium’s LiquidIO 2 will support 25G line interfaces and enable higher performance I/O virtualization with SR-IOV support. SR-IOV decreases networking latency and the load on the host CPU by enabling virtual machines to bypass the hypervisor virtual machine manager (VMM) and communicate directly with virtual functions (VFs) on the adapter card. With its faster interface and support for SR-VIO and full I/O virtualization, we believe the TAM for LiquidIO 2 is significantly larger than for the first generation. LiquidIO 2 remains on track to sample in 3Q15 and commence volume production in 1H16. CAVM announced several design wins with networking ODMs, including Edge-Core (Accton), LiteON and Inventec, and has designs underway with another tier-one ODM. ODMs confirmed Xpliant is more flexible/programmable than Broadcom’s Tomahawk, making the solution potentially more attractive to service provider and hyperscale data center customers. Xpliant is on track to ramp in 1Q16.

The Street is starting to weigh in on Intel (INTC) after the company this morning said it would spend $54 per share in cash for Altera (ALTR), maker of programmable chips, following a conference call at 10 am, Eastern, held by Intel CEO Brian Krzanich and CFO Stacy Smith.

Intel shares are down 46 cents, or 1.3%, at $34 while Altera stock is up $2.96, or 6%, at $51.82.

In early Street responses, David Wong of Wells Fargo reiterates an Outperform rating, writing that there are several benefits for the company:

We believe there are several benefits that Intel could realize on acquiring Altera: (1) Altera has already put substantial effort into next its next-generation high-end products at Intel with the intention of using Intel as a foundry and so there is already a manufacturing connection between the companies; (2) Intel has noted in the past that communications and networking infrastructure is a market in which it has relatively low penetration with its data center processors, with a total opportunity of perhaps about $16 billion, it estimates. Altera has broad penetration in most of the major communications and networking infrastructure systems makers. We believe that in many cases Intel’s processors are complementary to Altera’s PLD offerings, though in some cases they might be alternatives. (3) Altera’s gross margin (66% in 2014), and operating margin (28% in 2014) are a little higher than Intel’s (64% gross margin and 27.5% operating margin in 2014), even after Altera’s foundries generate a gross margin off Altera’s purchases. This suggests that if Altera merged with Intel the gross margin of Altera’s products manufactured in Intel’s fabs would be significantly above Intel’s corporate average gross margin from the stacked product/foundry margin opportunity. (4) Intel has partnered with Altera in the past, in highlighting offering PLD-based co-processors with its data center products. We think this is currently a tiny portion of Altera’s business, but nevertheless we think that Altera’s PLDs add to Intel’s Xeon Phi products in offering a range of customizable coprocessor solutions for computing intensive applications.

S&P Capital IQ‘s Angelo Zino reiterates a Buy on Intel, writing that the deal “presents greater opportunities within the attractive Data Center arena” and that “while INTC will need to leverage its balance sheet, we think its substantial cash position and cash flow generation provides ample financial flexibility.”

On the call, CEO Krzanich said the buy is “closely aligned” to Intel’s growth strategy. Although Altera’s expected to see a 9% revenue growth decline this year, Krzanich expects steady growth from the FPGA category overall

“Part of what we talked about is that this is a growth segment and when you look at this gross segment we wanted to look at both backwards in time for words projecting,” said Krzanich. “And we have built this acquisition on pretty much a normalized 7% compounded annual growth rate” for FPGAs.

Krzanich also emphasized how the integration of Altera’s “field-programmable gate arrays,” or FPGAs, will help Intel’s business in cloud computing running on Intel Xeon server chips:

FPGA significantly improve performance and cost, but what’s especially interesting is what happens when you integrate FPGAs with our Xeon processors. That combination by integrating the two products together improves performance, at the same time reducing costs even further. FPGAs also significantly improve the flexibility for our customers allowing them to quickly implement and update their algorithms. We expect limited shipments of in-package microprocessors in the latter half of 2016. And those will be followed over time with on-die integrated solutions. And by 2020 it is estimated that up to one third of cloud service provider nodes may use these FPGAs [...] We are buying an already strong business and a strong team. We think with our technology we can make that even better. That combined with innovative new products in the data center and IoT will enable us to create significant value for our owners.

Krzanich also said the FPGA content can boost Intel’s profile in the Internet of Things, especially in connected devices for the home.

CFO Smith noted various cost savings by bringing Altera in-house:

So on top of the benefit that we get of bringing out this new class of integrated products we also expect meaningful reductions in opex and improved Altera’s competitive line by bringing them onto our manufacturing processes and using our IDM tools. The opex reductions will be primarily focused on G&A, and those cost savings will grow over time. On the manufacturing side, we expect to create significant value by working with the Altera team to take advantage of the best process technology in the world. The opex reductions and the benefit of manufacturing leadership combine to produce the other 40% of the value that we expect to create.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.